by the author of dead companies walking

it’s (still) the economy, stupid

On Monday night, more than eighty million Americans watched our two candidates for president argue more about missing tax returns, deleted emails, and a former beauty queen than the issue that matters most to our country’s health and prosperity: economic growth.

When our economy grows rapidly, as it did during the Reagan and (Bill) Clinton administrations, good things happen. Home ownership increases, budget deficits shrink (Mr. Clinton produced a surplus his last four years), crime drops, and America’s influence increases worldwide. Unfortunately, our gross domestic product hasn’t grown more than four percent a year since the end of the last century, and I don’t see it topping that critical figure again anytime soon.

In both 2014 and 2015, US GDP expanded at a subpar 2.4 percent rate. The first half of 2016 was even more sluggish. GDP grew only one percent. While both George W Bush and Barack Obama inherited messes when they came into office—the terrorist attacks of 9/11 took place early in Bush’s first term and Obama had to contend with the fallout of the 2008/2009 financial crisis—each deserves a C-, at best, for their economic oversight.

I fear Hillary Clinton or Donald Trump will do no better. Hillary wants to increase personal income taxes, increase regulation of our fossil fuel industry, and keep the US corporate tax rate at 35 percent. Meanwhile, Trump’s anti-immigration rhetoric—immigrants, legal and illegal, start one-third of new businesses—and threatened trade wars could push our anemic economy into another recession. One wonders if Mr. Trump has ever read about, or even heard of, the ill-fated 1930 Smoot-Hawley tariff act and how it kick-started the Great Depression. I doubt it.

Here are seven straightforward tax and policy proposals that many economists agree would stimulate economic growth:

1) Lower the US corporate tax rate from 35 percent to the worldwide average of 20-22 percent and adopt a ‘territorial tax’ where offshore profits of US corporations are not ‘trued up’ to the higher US rate when those profits are repatriated. This would all but stop the ongoing inversions of corporate headquarters abroad and induce companies to bring offshore profits back to America. All told, S&P 500 companies now hold over $3 trillion in cash and earnings outside of the US, according to a recent report by Credit Suisse. Apple alone is sitting on more than $200 billion in offshore cash. Imagine how many jobs and opportunities even a portion of those enormous sums could create if our tax policy incentivized businesses to invest foreign earnings here at home?

2) Eliminate ALL income tax deductions. The US tax code was already a complicated mess almost forty years ago when President Jimmy Carter called it “a disgrace to the human race.” It’s far more complicated now. This leads to lower growth, ill-advised investment decisions, and money wasted preparing and filing tax returns. Contrary to popular opinion, most deductions benefit the upper middle and upper class. The ‘big five’ deductions are health insurance premiums, mortgage interest, state income taxes, charity donations, and retirement plans. Because every American already receives a standard deduction of $6300 for single taxpayers and $12,600 for married, these itemized deductions almost exclusively lower the tax obligations of the well-off while depriving the US Treasury of roughly $400 billion annually, vs. our total budget of $4 trillion.

3) Reduce the number of tax brackets from today’s seven to two or, at most, three. As importantly, the highest rate should be below 30 percent. Studies show that a higher top rate increases the likelihood taxpayers retire, cheat, or move away. While a single rate ‘flat tax’ sounds appealing, it is not equitable and more importantly is not politically feasible. I believe those who make large amounts should pay a higher rate than those who earn little. But I also believe the lowest rate should apply to most wage earners. Everyone needs ‘skin in the game.’

4) Adopt a balanced budget amendment. This would force politicians to stop (or at least slow) the explosion in our nation’s current $19 trillion in debt. Someday, possibly soon, investors worldwide will stop buying US bonds at today’s all-time low interest rates. When/if that occurs America’s annual interest cost will double to over $1 trillion. This will ‘crowd out’ other government spending, leading to a recession. Or worse.

5) Wind down Fannie Mae and Freddie Mac. These two quasi-governmental agencies, which purchase and securitize mortgage debt, exacerbated the 2008/2009 housing crisis. They could do so again as lenders make questionable home loans knowing they can quickly sell them (and book profits) to Fannie and Freddie. In her recent book Shaky Ground, author Bethany McLean wrote that many observers, including President Obama and former Fed chief Paul Volcker, support closing these entities. While this would increase mortgage rates from ¼ percent to possibly one percent, it would stop the risk Fannie and Freddie pose to America’s taxpayers.

6) Fix Social Security and Medicare. Without changes, Social Security will deplete its current surplus within 20 years. Government economists believe recipients will receive, at most, 70 percent of promised benefits when that occurs. There are only three options to avoid this: reduce benefits, increase payroll taxes, or do a little of both. A start would be to ‘means test’ benefits, reduce cost of living increases, and lift the amount at which payroll taxes are collected. Fixing Medicare is more complicated, but we have to allow Medicare/Medicaid programs—which buy about half of all health services—to negotiate directly with pharmaceutical companies, medical device manufacturers, and other health care providers.

7) Offer Medicare to all American taxpayers. The current Obamacare hybrid is destroying jobs because it forces corporations to pay health care premiums for a growing percentage of their employees. Many have responded by hiring fewer folks. If a government health plan was available to all Americans (and everyone with income above a nominal amount could buy that plan, another plan, or pay a substantial penalty), corporations could shed the burden of providing health benefits and focus on what they do best.

From a nonpartisan perspective, these seven proposals are all strongly pro-growth, no-brainer reforms. Several of them were included in the Bowles-Simpson tax plan a few years ago. And yet, because the plan threatened many of the special interest groups that own our political process, both President Obama and congressional Republicans refused to embrace it. Voters, and taxpayers, deserve better.

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5 thoughts on “it’s (still) the economy, stupid”

I agree completely. We need simplify the tax code. But I don’t see it happening as politicians use tax as a tool to get things from the firms and rich people. Unwinding Fannie looks doable. The rest, we will pray for the best or wait until the inevitable comes. Best way to have reforms is to really vote for the least candidate and keep educating others. Thank you for your post.

I think you grossly underestimate Trump. He has nothing against legal immigration. His grievance is against illegal immigration and quite rightly so, imho.

Another thing. I would bet that even a moderately successful businessman like Trump would be better at running the economy than a dozen Nobel Prize winning economists. We can agree to disagree on this one.

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"[Scott Fearon's] insights on the common ways that mature companies often doom themselves apply equally well to start-ups. Every business, young or old, needs to avoid the ... mistakes that he outlines."

About the Author

Scott Fearon has spent thirty years in the financial services industry.
Since 1991, Scott has managed a hedge fund in Northern California that invests in fast-growing companies with little or no Wall Street coverage while shorting the stocks of distressed businesses on their way bankruptcy.